Glenboden M & A Originations

Is Royal Unibrew leaning towards a private equity buy-out ?

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Origination Status proprietory origination, January 2011
Asset Royal Unibrew A/S (Denmark), regional beer company
Buyer candidates include CVC Capital (Holland), private equity firm
Seller shareholders of Royal Unibrew (listed on NASDAQ OMX)
Buyer Rationale Danish market and brands, critical mass in Europe
Seller Rationale acceptable valuation
NBs Unibrew sold its underperforming Polish operations in December 2010
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Royal Unibrew recently sold its Polish business "Łomża', to a local investor at a low valuation. We ask questions about its regional brand strategy, and assess the group's appeal as an acquisition target, leaning towards private equity firms like CVC.

Polish business lost ...In late 2010, Unibrew announced that it was to 'merge' its business in Poland, covering three regional brands headed by 'Łomża', with Van Pur, a mid-sized domestic brewer.

In reality it seems to be a cheap divestment. Unibrew is contributing the business at its net book value, and only gaining a 20% stake in the merged entity, with Van Pur also having an option to buy that residual later.

That poor valuation reflects the fact that Unibrew Polska was struggling to break even at the EBIT level. But it also asks a big question about the viability of regional brands in beer.

... challenges of regional brands ...In this case, by 'regional' we mean beer brands that are less that national or international. Unibrew's Polish brands, 'Łomża', 'Strzelec' and 'Brok', are focused on regions within Poland.

Regional brands have the advantage of lower marketing and supply-chain costs; but they can also have lower price points and margins than national brands.

Unibrew's relatively low EBITDA margin (see chart), by big beer standards, might be a reflection of that problem with regional brands. But it might also result from a related lack of scale.

... limited portfolio beyond Denmark ...Unibrew is clearly strong in its domestic Danish market, with a brand portfolio headed by its flagship 'Faxe' brand. Beyond Denmark, however, the group's business is somewhat limited.

Its presence in Italy is limited to the super-premium beer segment. In Germany it's largely a border-trade operation. In eastern Europe only the small Latvian and Lithuanian businesses are left, with Unibrew having now lost Poland.

Ultimately it could be that, from an M&A perspective, Unibrew's most attractive and sustainable asset is its core Danish business, with its international operations being only peripheral.

... acquisition candidate for private equityGiven the above profile, one scenario is for Unibrew to attract the attention of private equity buyers. Candidates include CVC Capital, who acquired InBev's central European beer portfolio, renamed 'StarBev', in 2009.

Unibrew's gross margin increased to nearly 50% in Q1-3 2010. So fundamentally it's an okay business, if consolidated with adjacent operations to create something with greater mass.

StarBev could be well suited to the above task, and has an additional enticement - Unibrew's net debt dropped by over 50% in the year to Q3 2010 (see chart).

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THIS LEAD'S VALUATION
Size (€ mln) 650
Sector beer
Asset Quality Denmark branded
Seller mid-cap plc
Buyer private equity
P/S 1,3
P/Ebitda 8,0
Type value estimate
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